WASHINGTON - Federal Reserve officials are likely to stick to a neutral policy on short-term interest rates that could prevail well into next year, analysts say.
With members of the 12-member Federal Open Market Committee scheduled to meet on Tuesday, the prevalent view among Fed watchers is that the panel will take a wait-and-see-attitude given recent evidence that the economy is improving.
Fed officials are also expected to watch what kind of budget President-elect Bill Clinton will offer once he is in office. Short-term rates have already moved higher in the belief Clinton will produce a modest economic stimulus plan that swells Treasury borrowing by $20 billion to $30 billion in fiscal year 1993, which began Oct. 1.
The upshot is that many analysts do not expect Fed officials to engineer any change in rates for the first half of 1993, and possibly longer.
"It looks like things are starting to strengthen a little bit, and it looks like we might be in for some stimulus in fiscal policy," said David Berson, chief economist for the Federal National Mortgage Association. "I think they'll have no change in current policy."
Since the Fed's last reduction in the federal funds rate to 3% from 3.25% on Sept. 4. bond market expectations of an easing in monetary policy have faded amid a spate of positive economic reports. "The debate now is whether to have stimulus or leave everything alone," said William Hummer, president of Wayne Hummer & Co. in Chicago.
Clinton has said he has yet to decide whether to add to the budget deficit in the first year of his administration. Many analysts think he will do so, offering at the same time a package of tax increases and other deficit reduction measures in later years to try to maintain the confidence of financial markets.
Moreover, Clinton made clear during last week's economic conference in Little Rock that he views long-term deficit reduction as essential o promoting economic growth.
Clinton also said for the first time last week that he does not want Federal Reserve Board Chairman Alan Greenspan and his colleagues to block the new administration's plans to revive growth. Asked by reporters what his position would be if the Fed moved to tighten rates, he replied, "I would be opposed to that unless there is a serious return to inflation."
Clinton added that he does not see any inflation threat at present. The consensus of participants at the economic summit, he said, is that "there is a huge undercapacity in this economy."
Fed officials themselves remain optimistic about inflation and see little danger of any increase in price pressures, even amid the evidence the economy is improving. Federal Reserve Vice Chairman David Mullins told reporters last week that the actual inflation rate, taking into account measurement errors, is around 2%.
Mullins estimated that this year's official core rate of inflation, excluding food and energy prices, will be around 3%. He added, "I think we'll see some additional progress next year" in trimming inflation another notch. Mullins also expressed the hope that if the economy continues to expand at a 3% rate, the unemployment rate can be reduced further.
Another sign the economy is improving is expected tomorrow, when the National Bureau of Economic Research is set to officially declare an end to the recession. The five-member panel of academic economists is the official record-keeper for swings in the economy. Sources said the panel will announce its judgment that the recession began in July 1990 and ended in the latter half of this year, perhaps in the fall.
Fed policymakers are under enormous pressures not to spoil the party and start tightening while the economy is still under stress and unemployment remains high, said Hummer. "They don't want to be like a runner who carries the ball for a touchdown to the wrong side of the field."
Analysts see growth in the range of 2.5% to 3% in 1993, without inflationary pressures. For the Fed, it is an ideal set of conditions that leaves the central bank out of the picture while Clinton has the stage on economic policy.
Even a quicker pace of economic activity for the first half of the year might not move the Fed to tighten policy right away because it will take time for businesses to raise production levels and hire workers, some analysts say.
"It may sound wacko, but I don't see anything big happening until 1994," said Stephen Slifer, senior vice president for Lehman Brothers. He agreed with Mullins that inflation will move lower next year, which should bring higher bond prices. "There's no reason in the world that bond yields should be hanging out there at 7.5%."
Mickey Levy, chief economist for CRT Government Securities, said he expects Fed officials to stay neutral.. "through the first half of the year." If the economy remains subdued and inflation stays under control, "they may be on hold for longer."